In federal criminal investigations, corporate health care providers have faced a Department of Justice increasingly focused on individuals, one that has limited or foreclosed cooperation credit for corporations not providing complete information on all individual involvement. At a conference in late November, Deputy Attorney General Rod Rosenstein outlined a modification of these stringent guidelines, to some extent for criminal prosecutions cases but more significantly for civil cases.

The 2015 Yates Memorandum established DOJ’s policy on individual accountability for corporate wrongdoing. This policy provided that corporations must provide all relevant facts about individuals to be eligible for any cooperation credit; criminal and civil investigations should focus on individuals from inception; no corporate resolution will provide protection from criminal or civil liability for any individuals; and considerations for civil suits against individuals should go beyond ability to pay, stressing deterrence and accountability.

Rosenstein first highlighted the consistencies of the new approach with the Yates Memorandum, as pursuing individuals responsible for wrongdoing is still a top DOJ priority. Any company seeking cooperation credit must identify all individuals substantially involved in or responsible for the criminal conduct. However, “investigations should not be delayed merely to collect information about individuals whose involvement was not substantial, and who are not likely to be prosecuted.” In criminal cases, this will allow cooperation credit without identifying every person involved, as long as the company discloses individuals who played significant roles or who authorized the misconduct.

Rosenstein said the changes were driven in large part by DOJ’s affirmative civil enforcement cases, where the changes are more substantial. The primary goal of these cases is to recover money, and DOJ found the Yates Memorandum’s “all or nothing” approach to cooperation counterproductive in civil cases. “When criminal liability is not at issue, our attorneys need flexibility to accept settlements that remedy the harm and deter future violations, so they can move on to other cases. … Our civil litigators simply cannot take the time to pursue civil cases against every individual employee who may be liable for misconduct.”

The new policy gives DOJ civil attorneys the discretion to offer some credit even if a company does not qualify for the maximum credit that comes with identifying every individual substantially involved in or responsible for the misconduct, as long as the company meaningfully assists the government’s investigation and does not conceal wrongdoing. DOJ civil lawyers can negotiate civil releases for individuals who do not warrant additional investigation and, importantly, can consider an individual’s ability to pay in deciding whether to pursue a civil judgment. Rosenstein said these “commonsense reforms” would return to DOJ civil attorneys the discretion they previously exercised in civil cases, to “use their resources most efficiently to achieve their enforcement mission.”

The practical implications of this change will play out over time. Rosenstein’s language suggests that a significant dividing line will be whether individual U.S. Attorney’s Offices view the conduct at issue as a joint criminal-civil matter or as a civil matter without a parallel criminal case. In the former, the only change may be an understanding that the company may be able to streamline the number of people that are the focus of investigation and disclosure. In a purely civil investigation or case, however, Rosenstein’s language indicates significant discretion will be given to DOJ civil attorneys to work out practical settlements that aim towards monetary recoveries for the government and victims, as well as an efficient use of resources to maximize recovery across all cases. In at least the purely civil cases, Rosenstein’s comments offer significant arguments to defense counsel to propose and advocate the practical resolution of government investigations and cases.

In United States ex rel. Wood v. Allergan, Inc., the Second Circuit addressed the issue of whether a violation of the False Claims Act’s “first-to-file” rule compels dismissal of an action or whether it can be cured by the filing of an amended or supplemental pleading. The Court’s acceptance of the interlocutory appeal was addressed here in a post last year. In August, the Second Circuit reversed the District Court, holding that a violation of the first-to-file bar cannot be remedied by amending or supplementing the complaint.

Relator John Wood brought FCA claims against Allegan, a pharmaceutical company that develops and manufactures eye care prescription drugs. Wood alleged that Allergan violated the FCA and the Anti-Kickback Statute by providing large quantities of free medical products to physicians to entice them to prescribe Allergan drugs. When Wood brought his action, two other actions alleging similar FCA violations were pending.

The Initial Qui Tam Complaint Violated the “First-to-File” Bar

The FCA’s “first-to-file” rule states that once a qui tam action has been brought, no person other than the Government may intervene or bring a related action based on the same facts. The first-to-file rule ensures that only one relator shares in the Government’s recovery and encourages potential relators to file their claims promptly. Because two prior actions were pending when Wood filed his qui tam complaint, it ran afoul of the first-to-file bar.

The Wood complaint, however, was under seal, and while it remained under seal, the two prior actions were dismissed. When the government declined to intervene in the Wood action and the case was unsealed, there were no longer any prior-filed pending actions. Wood thereafter filed a third amended complaint. Allergan moved to dismiss on several grounds, including the “first-to-file” bar, because when the Wood qui tam complaint was commenced, there were two pending actions alleging the same factual allegations.

The Second Circuit first held that the first-to-file rule applied, rejecting Wood’s argument that the earlier actions failed to adequately allege an FCA claim. Even if Wood’s allegations were broader than the prior complaints, the claims were related, as the alleged schemes were sufficiently similar, and the Government would have been equipped to investigate them. In addition, the Court rejected as unworkable the argument that the Judge in a later-filed case could address the sufficiency of an earlier-filed case pending before a different Judge, potentially even before the first Judge had done so.

An Amended Pleading Cannot “Cure” a First-to-File Violation

In Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, the Supreme Court had held that “an earlier suit bars a later suit while the earlier suit remains undecided but ceases to bar that suit once it is dismissed,” dismissing the later filed action without prejudice. Wood therefore would have been able to commence a new action once the two prior actions had been dismissed. However, due to the passage of time, statutes of limitation would have barred a new action. Wood argued that the first-to-file bar could be “cured” by amending or supplementing the complaint after dismissal of the earlier actions. Other Circuits have split on this question.

The Second Circuit followed a D.C. Circuit decision to hold that Wood’s “action was incurably flawed from the moment he filed it.” The Court found that the plain language of the FCA provides that no individual may bring a related action when an FCA action is pending, and that the plain language required dismissal. The Court determined that Wood’s position—a first-to-file violation can be cured by a later amendment—is inconsistent with the language of the statute. The Court reasoned that the statute bars a person from bringing a related action when a prior FCA action is pending; it does not provide for the second action to be stayed until the first-filed action is no longer pending. An amended or supplemented pleading could not change the fact that Wood brought the action when another related action was pending.

The Court also posited several inefficiencies from Wood’s suggested approach: inequities among Relators with later-filed complaints depending on the happenstance of when their complaint was dismissed or whether their case was stayed; questions as to which later-filed case would proceed; and a potential lineup of later-filed cases waiting to take the place of a dismissed earlier action. Finally, the Court found support in legislative history, indicating that the primary, if not sole, purpose of the first-to-file rule is to help the Government uncover and fight fraud. The Court found it unlikely that Congress would have invited an inefficient process prone to anomalous outcomes, dependent on the chance considerations of one Court’s backlog and another Court’s timeliness of dismissal.

This Second Circuit decision, following the D.C. Circuit, now conflicts with a First Circuit decision finding the argument that amendment cannot cure a first-to-file violation to be “untenable.” The Supreme Court may be called on to decide this Circuit split.

Unlike most other types of employment arrangements involving physicians, physicians acting as a medical director are compensated purely for the performance of administrative services related to patient care services. That is not to say that a medical director does not play a crucial role in the operation of a health care provider. In fact, the New York State Department of Health recommends, or even requires, medical directors be put in place for certain types of providers, and federal law similarly requires medical directors for certain types of services and facilities.

Because medical directors are not performing medical services, many physicians feel comfortable entering into medical directorship with little or no written documentation. However, physicians should proceed with caution when undertaking a medical director role. In particular, medical director arrangements are often scrutinized by the Office of the Inspector General (“OIG”) of the U.S. Department of Health and Human Services to determine whether the arrangement is, in reality, being used as a vehicle to provide remuneration to physicians for patient referrals. For this reason, where the contracting provider participates with federal payors and the physician may refer patients to the contracting provider, the physician should enter into a written medical director agreement that is structured to fall within an exception (or safe harbor) to the federal Stark and anti-kickback statutes.

Most often, the exception used under both Stark and anti-kickback laws will be the “personal services” safe harbor. Although slightly different under each statute, some key elements in complying with the “personal services” safe harbor are as follows:

Written Agreement: The agreement between the physician and the provider should be in writing, with a term of not less than one year. [1]

Duties: The agreement should provide for all of the services which the physician is expected to perform.[2]

Commercially Reasonable: The services provided by the medical director should be necessary to the provider and not exceed the amount of services required by the provider. This analysis is focused not only on whether the contracting physician’s services in and of themselves are necessary, but also whether there are other medical directors and whether numerous medical directors are performing duplicative services.[3]

Fair Market Value – The physician should be paid fair market value for the services provided. To this end, it might be helpful to obtain a fair market value analysis, taking into account the geographic location, the experience of the physician, the certification of the physician, and they type of facility. While having such an analysis is not an absolute defense in an investigation, it is useful to demonstrate that fair market value was analyzed and that the remuneration falls within what was believed to be an acceptable range.

Hourly Rate – It is recommended that the medical director be paid on an hourly basis, with such hourly rate being paid at the fair market value rate.

Cap on Compensation – it is also recommended that the aggregate compensation a physician can earn for his documented hours be capped, to further ensure reasonableness.[5]

Documentation: The physician should keep daily time logs of services performed and the time spent on each service. This shows that the physician is performing real work, for which he or she is being paid fair market value, and also can be used to demonstrate that the services being performed are necessary for the facility.

While it is always best to consult with an experienced professional before entering into medical director arrangement, adhering to the criteria set forth above can offer protection for both the physician and the facility.

[1] 42 CFR 1001.952(d)(1): “The agency agreement is set out in writing and signed by the parties.” 42 CFR 1001.952(d)(4): “The term of the agreement is for not less than one year.” 42 U.S.C. 1395nn(e)(3)(A)(i): “the arrangement is set out in writing, signed by the parties, and specifies the services covered by the arrangement.” 42 U.S.C. 1395nn(e)(3)(A)(iv): “the term of the arrangement is for at least 1 year.”

[2] 42 CFR 1001.952(d)(2): “The agency agreement covers all of the services the agent provides to the principal for the term of the agreement and specifies the services to be provided by the agent.” 42 U.S.C. 1395nn(e)(3)(A)(ii): “the arrangement covers all of the services to be provided by the physician.”

[3] 42 U.S.C. 1395nn(e)(3)(A)(iii): “the aggregate services contracted for do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement.”

[4] 42 CFR 1001.952(d)(5): “The aggregate compensation paid to the agent over the term of the agreement is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs.” 42 U.S.C. 1395nn(e)(3)(A)(v): “the compensation to be paid over the term of the arrangement is set in advance, does not exceed fair market value, and . . . is not determined in a manner that takes into account the volume or value of any referrals of other business generated between the parties.”

[5] In OIG Advisory Opinion No. 01-17 (2001), the OIG said that even though total aggregate compensation over the contract has not be set in advance, the totality of facts and circumstances in the specific circumstances at hand yield a conclusion that there is no significant increase in risk of fraud and abuse – however, this finding was likely due to the presence of a monthly payment cap. In 2003, in Advisory Opinion 03-8, the OIG found that a proposed arrangement does not qualify for protection under the safe harbor because the aggregate compensation paid under a management agreement would not be set in advance.

While there has been discussion of the potential proliferation of telemedicine for quite some time, telemedicine is finally positioned to take off thanks to the latest federal budget. The Bipartisan Budget Act of 2018 incorporated the text of the CHRONIC Care Act,[1] which facilitates Medicare reimbursement for telemedicine services by – among other things – allowing Medicare accountable care organizations to build broader telehealth benefits into Medicare Advantage plans and expand the use of virtual care for stroke and dialysis patients. While many providers are eager to take the leap into telemedicine, there are still some things to look out for:

Not all states have caught up – while the vast a majority of states have enacted legislation mandating private insurers provide some degree of parity of insurance coverage between in-person and telehealth services, at least a dozen states have enacted no such legislation at all.

Beware of Stark, Anti-Kickback and private inurement violations, as telemedicine often involves complex arrangements between physicians and healthcare facilities. To that end, make sure the terms of any compensation arrangement are commercially reasonable and/or consistent with fair market value. And be vigilant when evaluating market data, as pricing may vary widely due to participants coming into a market at low cost for strategic reasons. Market data may also be impacted by accessibility to healthcare services in certain localities. The Office of Inspector General of the Department of Health and Human Services (OIG) has issued Advisory Opinions related to telemedicine compensation arrangements that should be considered when reviewing such arrangements. Additionally, in April of this year OIG issued a report highlighting instances of improper billing for telemedicine services.

One area on which practitioners have particularly set their sights is telemedicine for opioid addiction treatment. However, unlike the popular telemedicine practices of dialysis and stroke treatment, substance abuse treatment via telemedicine has its own set of constraints.

Providers of Medication-Assisted Treatment to reduce opioid use disorders have restrictions on the number of patients they may treat at any given time, with a limitation of 30 patients for their first certification year and the opportunity to increase to 100 in the subsequent year upon fulfilment of certain criteria.

Additionally, restrictions on a provider’s ability to prescribe certain controlled substances used to treat opioid use disorder over telemedicine exist under both state and federal laws.

In sum, while the CHRONIC Care Act facilitates further foray into the expanding world of telemedicine, there are many pitfalls to be aware of in both ensuring compliance with applicable laws and ensuring the ability to set up a profitable business. Always consult with an experienced professional before expanding your practice.

EDNY Judge Brian Cogan recently addressed the False Claims Act public disclosure bar and original source rule in a decision based on a qui tam Relator’s claims that defendants marketed a test to measure the levels of a certain hormone knowing that the test was flawed. In United States ex rel. Patriarca v. Siemens Healthcare Diagnostics, Inc., Relator alleged that Medicare suffered significant losses because medical professionals ordered treatments based on the test’s inaccurate results.

The Background of PTH Testing

Judge Cogen started his opinion with a lengthy discussion of the medicine that led to Relator’s complaint. Patients with chronic kidney disease may have high levels of parathyroid hormone (“PTH”), which can lead to bone disease. Vitamin D analogs are used to treat high levels of PTH, but overdosing of these analogs can lead to serious health consequences. Accurate diagnosis of PTH levels is therefore critical.

In 1987, Nichols Diagnostics produced a PTH test, the “IRMA Test,” that was performed manually and required a several-hour long incubation period. The test was approved by the FDA and became the industry standard.

The Siemens Test, used to measure PTH levels, was a Second Generation PTH test, measuring the whole PTH molecule and large fragments of the molecule. The Siemens Test was purportedly aligned with the IRMA test. Third Generation tests report only the level of whole PTH molecules and omit the fragments, so Second Generation tests report PTH levels roughly twice that of Third Generation tests.

Later versions of the Nichols Tests “drifted” upward, consistently overstating patient’s PTH levels, leading to medically unnecessary prescriptions and surgeries. After a qui tam action relating to the tests’ inaccuracy and a substantial settlement with the government, Nichols withdrew its tests from the market.

In his qui tam complaint, filed in 2011, Relator alleged the Siemens Test had materially “drifted” from the IRMA test. Relator based his allegation primarily on separate parallel experiments he conducted. Relator compared the Siemens Test to the PTH test developed by his own company, the Scantibodies Test, a Third Generation test.

Public Disclosures of PTH Testing Issues

In the 2006 Souberbielle Study, European scientists studied various PTH tests, including the Siemens Test, compared them to the IRMA Test, and published their findings. The study concluded, among other things, that the values yielded by Second Generation tests varied widely. The study also determined that clinicians should monitor a patient’s PTH levels over a series of tests, as opposed to making clinical decisions on the basis of a single finding. The study also showed a significant differential between the Siemens and Scantibodies Tests.

An article published in 2007 noted that: (1) industry guidelines were based on the IRMA Test; (2) the absolute results obtained from various PTH tests varied from those of the IRMA Test; and (3) the 2006 Souberbielle Study documented this variability. Based on these observations, the author recommended that nephrologists use a single laboratory for results and look at trends in PTH as opposed to single values.

A 2009 study published by the relator who brought the successful Nichols qui tam action disclosed the results of parallel testing of various PTH tests. The study concluded that the Siemens Test generated results that were on average 36% higher than the Scantibodies Test. This was nearly the same differential as that disclosed in the 2006 Souberbielle Study.

Relator argued in his qui tam complaint that the upward drift he observed in the Siemens Test caused physicians to prescribe hundreds of millions of dollars of medically unnecessary Vitamin D, and to conduct untold numbers of medically unnecessary parathyroidectomies. Relator also alleged that Medicare paid for a portion of the cost of the Siemens Test, for prescribed Vitamin D and its analogs, and for surgeries related to elevated PTH levels.

The Public Disclosure Bar

Judge Cogan first addressed the FCA’s public disclosure bar, which bars claims for conduct that has already been made public. The bar discourages “opportunistic plaintiffs” with no significant information of their own who may bring “parasitic lawsuits.”

Prior to the 2010 FCA amendments, the public disclosure bar applied where a qui tam action was “based upon the public disclosure of allegations or transactions.” The Second Circuit and the majority of circuits had held that a relator’s claim was “based upon” the public disclosure if the allegations in the complaint were “substantially similar” to the publicly disclosed information. The 2010 FCA amendment generally followed this majority approach and identified the inquiry as whether “substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed.”

The Second Circuit has applied a broad view of the public disclosure bar. Under that standard, earlier disclosures will bar a relator’s claim if they were sufficient to set the government squarely upon the trail of the alleged fraud. The bar is triggered if material elements of the fraud have been publicly disclosed, and does not require that the alleged fraud, itself, have been disclosed. Also, merely providing more specific details about what happened or translating technical information into digestible form does not negate substantial similarity. Public disclosures under the FCA include the news media and disclosures in scientific and scholarly journals.

After summarizing this caselaw, the Court held that before the Relator filed his complaint: (1) the variation between PTH tests was widely known; (2) physicians were advised to adjust their course of treatment accordingly; (3) Second Generation tests, such as the Siemens Test, were known to yield higher absolute results than Third Generation tests, such as the Scantibodies Test; and 4) the average difference between the Siemens and Scantibodies tests had been published in several studies. As a result, the public disclosure bar applied to Relator’s claims.

The Original Source Rule

Having decided that the public disclosure bar applied, the Court examined whether Relator qualified as an “original source” despite the earlier public disclosures. The FCA definition of “original source” was amended in 2010.

Under the pre-amendment version of the FCA, an original source was “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.” Under the 2010 version, an “original source” is an individual who “has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.”

Judge Cogan outlined various approaches Courts have taken in deciding whether a Relator is an original source: the new information “materially adds to what has already been revealed through public disclosures” (First Circuit); the Relator’s “key facts” are not “already thoroughly revealed” (Eighth Circuit); Relator’s information must “add value” (D.C. Circuit); Relator must bring “more than expertise or a novel analysis to the table” (S.D.N.Y.).

The Court determined that Relator was not an original source. First, over the course of years, the Siemens and Scantibodies tests had been repeatedly compared to each other in a number of published studies. Second, Relator’s findings did not materially depart from earlier ones and were not sufficiently or qualitatively different from the publicly disclosed information. The Court dismissed Relator’s complaint.

The last several years have brought increasing numbers of qui tam actions brought by Relators who are aware of the potentially significant recoveries those actions can bring. The public disclosure bar and the original source rule provide qui tam defendants with arguments to fend off these cases if they are brought by opportunistic relators who are seeking to trade on public information.

This, the last of our posts on the 2018-19 New York State Health Budget (the “Enacted Budget”), focuses on an area of healthcare that has perhaps the broadest impact of the sector as a whole — managed care. A prior post in the series (here) discussed the central role that hospitals have traditionally played in healthcare reform efforts, but even they have less influence (at least, as a matter of policy) than managed care, which controls the funding that fuels virtually every other part of the healthcare system. For purposes of this article, “managed care” really means Medicaid managed care in all its various guises, since that is the funding most directly controlled by the State – while the various forms of Medicare managed care (Medicare Advantage, Medicare Part D, etc.) and commercial managed care are important, and even critical, to the healthcare system in New York, they are generally not a focus of State budgeting (at least directly). So this post will focus on the various forms of Medicaid managed care, including managed long term care (MLTC) that provide long term care services, fiscal intermediaries for consumer-directed consumer assistance, mainstream managed care plans that provide acute and primary care services, health homes that coordinate care for people with chronic illnesses, and others. Note that one species of Medicaid managed care, Development Disabilities Individual Support and Care Coordination Organizations, are not addressed in this post, but were addressed in a prior one (here).

Just a quick word before examining the key provisions impacting managed care: this series has not pretended to be a comprehensive analysis of all the healthcare provisions in the 2018-19 New York State Health Budget. It has merely provided a survey of the highlights of certain key areas in the healthcare space. Inevitably, some areas have not been directly addressed; particular ones that come to mind include primary care, professional practice, life science research and others. In part, this was due to the lack of significant reforms in those areas; however, it was also true that the sectors we did address often included references to those other sectors. Nowhere is this truer than in regard to managed care, which, as noted, touches on every other area of healthcare. Key provisions in the managed care space are summarized below.

Managed Long Term Care & Fiscal Intermediaries

Managed Long Term Care (MLTC) Eligibility. Since 2012, adults have been eligible for MLTC enrollment if they require community-based care for more than 120 days. The Enacted Budget provides that, effective April 1, such individuals are only eligible if that 120 days is a continuous, not aggregate, period.

Changing MLTC Plans. Effective October 1, 2018, the Enacted Budget allows MLTC enrollees to switch plans without cause anytime within 90 days of notification or the effective date of enrollment (whichever is later), but thereafter, the Department of Health (DOH) is authorized to prohibit changing plans more than once every 12 months, except for good cause. “Good cause” includes poor quality of care, lack of access to covered services, and lack of access to providers “experienced in dealing with the enrollee’s care needs,” and may include other categories identified by the Commissioner of Health.

Nursing Home Resident Eligibility. Effective April 1, 2018, the Enacted Budget provides that individuals who are permanently placed in a nursing home for a consecutive period of three months or more will not be eligible for MLTC, but instead will receive services on a fee-for-service basis. In a side letter, DOH has promised to provide guidance highlighting information about an individual’s rights as a nursing home resident, nursing home and MLTC plan responsibilities, and supports for individuals who wish to return to the community.

Plan Mergers. Effective April 1, 2018, surviving plans in a plan merger, acquisition or similar arrangement must submit a report to DOH within 12 months providing information about the enrollees transferred, a summary of which DOH will make available to the public.

Licensed Home Care Services Agency (LHCSA) Contracting. As discussed in a prior post (here), beginning October 1, 2018, the Commissioner of Health may limit the number of LHCSAs with which an MLTC plan may contract, according to a formula tied to region, number of enrollees and timing (before or after October 1, 2019), with some exceptions. In a side letter, DOH has indicated that it will issue guidance to assist both MLTC programs and LHCSAs in minimizing the disruption of care for Medicaid members and the impacted workforce from this initiative.

Fiscal Intermediary Advertising. The Enacted Budget includes provisions that limit the advertising practices of fiscal intermediaries under the Consumer Directed Personal Assistance Program (CDPAP). CDPAP provides chronically ill and/or physically disabled Medicaid enrollees receiving home care services with more flexibility and freedom of choice to obtain such services. Fiscal intermediaries help consumers facilitate their role as employers by: providing wage and benefit processing for consumer directed personal assistants; processing income tax and other required wage withholdings; complying with workers’ compensation, disability and unemployment requirements; maintaining personnel records; ensuring health status of assistants prior to service delivery; maintaining records of service authorizations or reauthorizations; and monitoring the consumer’s/designated representative’s ability to fulfill the consumer’s responsibilities under the program (in this regard, they are not truly managed care, although there are some similarities). The Enacted Budget prohibits false or misleading advertisements by fiscal intermediaries. Furthermore, fiscal intermediaries are now required to submit proposed advertisements to DOH for review prior to distribution, and are not permitted to disseminate advisements without DOH approval. The DOH is required to render its decision on proposed advertisements within 30 days. In the event DOH has determined the fiscal intermediary has disseminated a false or misleading advertisement, or if an advertisement has been distributed without DOH approval, the fiscal intermediary has 30 days to discontinue use and/or remove such advertisement. If DOH determines a fiscal intermediary has distributed two or more advertisements that are false or misleading or not previously approved by DOH, the entity will be prohibited from providing fiscal intermediary services and its authorization will be revoked, suspended or limited. Additionally, DOH will maintain a list of these entities and will make this list available to local departments of social service, health maintenance organizations, accountable care organizations and performing provider systems. These limitations apply to marketing contracts entered into after April 1, 2018.

Fiscal Intermediary Reporting. The Enacted Budget allows the Commissioner of Health to require fiscal intermediaries to provide additional information regarding the direct care and administrative costs of personal assistance services. DOH may determine the type and amount of information that will be required, as well as the regularity and design of the reports. These cost reports must be certified by the owner, administrator, chief administrative officer or public official responsible for the operation of the provider. The DOH must provide at least 90 days’ notice of this report deadline. If DOH determines the cost report is not complete or inaccurate, it must notify the provider in writing and specify the correction needed or information required. The provider will have 30 days to respond to DOH’s request for supplementary information. In the event a provider cannot meet this filing deadline, DOH may provide an additional 30 day extension if the provider sends written notice prior to the report due date which details acceptable reasons beyond their control which justify their failure to meet the filing deadline.

Mainstream Managed Care and Health Homes

Quarterly Meetings on Medicaid Managed Care Rates. In a side letter, the Executive has committed to providing quarterly updates to the Legislature regarding Medicaid managed care rates, including the actuarial memorandum which, pursuant to statute, is provided to managed care organizations 30 days in advance of submission to the federal Centers for Medicare and Medicaid Services (CMS). This is intended to increase the transparency of Medicaid managed care rates.

Separate Rate Cells or Risk Adjustments for Specific Populations.In a side letter, DOH has committed to exploring separate rate cells or risk adjustments for the nursing home, high cost/high need home and personal care, and Health and Recovery Plan (HARP) populations. DOH will re-engage CMS regarding this reimbursement methodology with the assistance of health care industry stakeholders impacted by these changes (e.g. advocates, providers and managed care organizations). This will hopefully lead to a fairer rate structure for plans serving higher-risk patients.

Health Homes Targets. The Enacted Budget requires the Commissioner of Health to establish reasonable targets for health home participation by enrollees of special needs plans and other high risk enrollees of managed care plans to encourage plans and health homes to work collaboratively to achieve such targets. The DOH was also empowered to assess penalties for failure to meet such participation targets where they believe such failure is due to absence of good faith and reasonable efforts.

Health Home Criminal History Checks. The Enacted Budget requires criminal history checks for employees and subcontractors of health homes and any entity that provides community-based services to individuals with developmental disabilities or to individuals under 21 years old.

Health Home Reporting. Similar to fiscal intermediaries (above) and LHCSAs (here), the Enacted Budget allows the Commissioner of Health to require health homes to report on the costs incurred to deliver health care services to Medicaid beneficiaries.

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So that concludes our series on the 2018-19 New York State Healthcare Budget. If you have any questions or would like additional information on any of the above referenced issues, or any of the other items covered (or not covered) in the series, please do not hesitate to contact Farrell Fritz’s Regulatory & Government Relations Practice Group at 518.313.1450 or NYSRGR@FarrellFritz.com.

A hospital victimized by the sale of adulterated and mislabeled drug products successful obtained a Court order imposing restitution of over $825,000 earlier this month. EDNY Judge I. Leo Glasser’s decision in United States v. Tigheprovides a helpful summary of restitution standards, and applies them to the response efforts of Yale-New Haven Hospital (“YNHH”) to protect patients from potential harm from mold-contaminated IV bags.

Defendants Pled Guilty To Selling Mold-Contaminated IV Bags

In Tighe, the two defendants were the owner and the director of pharmacy at Med Prep Consulting, Inc., a medical drug repackager. They pled guilty to wire fraud for failing to comply with professional standards for drug sterility and by introducing adulterated and misbranded drugs into the marketplace. YNHH sought restitution as one of the healthcare provider victims to whom Med Prep sold drug products.

The allegations of the superseding information were alarming. YNHH discovered visible floating particles in four IV bags of magnesium sulphate that were sold and labeled as sterile by Med Prep. The four IV bags were found to be contaminated with mold. Med Prep had sent YNHH four shipments of contaminated magnesium sulphate drug product. The defendants and Med Prep failed to meet acceptable industry standards in handling sterile drugs, including:

Air filters in Med Prep’s cleanroom repeatedly failed inspections over five years.

A cart was regularly pushed from Med Prep’s unsanitary warehouse (which contained mold) into the purportedly sterile cleanroom without being sterilized.

Med Prep continued to clean surfaces with non-sterile isopropyl alcohol, which is inadequate to kill mold spores.

The Mandatory Victim Restitution Act (“MVRA”), 18 USC § 3663A, provides that, for all offenses against property, including fraud, the Court shall order that the defendant make restitution to the victim. Restitution under the MVRA is only available to a statutorily defined victim of the offense, and only for losses that were directly and proximately caused by the offense for which the defendant has been convicted.

Also, where the victim has not suffered injury or death, the MVRA only allows restitution for (1) “damage to or loss or destruction of property,” and (2) “necessary … expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.” Although the necessary expenses category lacks definition, Judge Glasser quoted the Second Circuit admonition in United States v. Maynard that it “takes a broad view of what expenses are ‘necessary.’”

Yale-New Haven Hospital’s Restitution Claim

In addressing YNHH’s restitution claim, the Court first recognized that the MVRA applied to the fraud claim and that YNHH was a statutory victim entitled to restitution. While defendants asserted that YNHH’s losses were not proximately caused by the offense, the Court rejected this argument because it was made after the 14-day time period to object to the presentence report. The presentence report had found that the defendants’ conduct directly and proximately caused the contamination at YNHH and the financial losses YNHH incurred. The Court also determined that the defendants’ failure to timely object was strategic, because a timely objection could have undercut their arguments that they were remorseful and accepted responsibility.

The Court next addressed whether YNHH’s losses were (i) “damages to or loss or destruction of property” and (ii) “necessary … expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.”

Damages to Property

The Court first determined that YNHH’s “straightforward” losses to property were recoverable, including:

The cost of drug products returned to Med Prep; and

The cost of terminating all consigned medication housed at Med Prep.

The Court accepted YNHH’s undisputed assertions as to the value of the recalled drug products and the consigned products that were terminated.

Legal Fees and Costs

YNHH also sought recovery of legal fees and costs associated with the collection, review and preservation of documents requested by the government. The Second Circuit has held that “necessary expenses” for restitution can include attorney fees and accounting costs. Here, the Court found these expenses were recoverable because they related to YNHH’s responses to various subpoenas issued by the Department of Justice in connection with the case.

Responses to the Discovery of Contaminated Drug Products

The most interesting question addressed by the Court was whether expenses incurred as a result of YNHH’s responses to the discovery of the contaminated drug products were subject to restitution. These included:

Patient and physician notification

Purchase of anti-fungal prophylactic medication

Patient disease surveillance

Hospital administrative time responding to the contamination

Pharmacy in-house admixture services and additional staffing

Pharmacy response to the contamination

The District Court first noted the Second Circuit’s “broad view” of necessary expenses for restitution, and held that these were necessary expenses for restitution. YNHH needed to sequester and inventory the contaminated drug product from Med Prep, examine the sequestered drug product for mold, and notify patients potentially affected by the contamination. The expenses were necessary to protect YNHH’s ongoing, legitimate interest in the health of its patients and its duty to protect that interest. In addition, YNHH had a need to purchase anti-fungal medication and an obligation to monitor potentially exposed patients. YNHH’s interest in its patients’ health also required it to participate in various regulatory responses, and it needed to replace the drugs that had been contaminated.

Fraud Victims Should Take the “Broad View” in Seeking Restitution for Losses and Expenses Due to Fraud

Judge Glasser’s decision in United States v. Tighe provides a strong basis for victims of fraud to seek restitution for a broad array of monetary losses arising out of fraud and their involvement in addressing the consequences of the fraud and assisting in the government’s prosecution.

The Department of Justice issued two memoranda at the start of 2018 that may have important effects on health care fraud investigations and prosecutions under the False Claims Act.

The first, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A), was issued by Michael Granston, Director of the DOJ Commercial Litigation Branch, Fraud Section, and encourages DOJ attorneys to seek dismissal of a relator’s complaint if the government is declining to intervene in the case. The memorandum describes the statute authorizing dismissal as “an important tool to advance the government’s interests, preserve limited resources, and avoid adverse precedent”, and it provides a non-exhaustive list of factors that DOJ attorneys should use as a basis for dismissal:

Does the qui tam complaint lack merit, whether based on an inherently defective legal theory or frivolous factual allegations?

Does the qui tam action duplicate a pre-existing government investigation and add no useful information?

Does the qui tam action threaten to interfere with an agency’s policies or the administration of its programs?

Is dismissal necessary to protect the government’s litigation prerogatives?

Is dismissal necessary to safeguard classified information?

Are the government’s costs in monitoring or participating in a qui tam action continued by the relator likely to exceed any expected gain?

Do the relator’s actions frustrate the government’s efforts to conduct a proper investigation?

The government has sought to dismiss declined qui tam complaints in the past, but more often has allowed the relator to go ahead with the case. The Granston Memorandum emphasizes the advantages to the government in ending non-intervened qui tam cases early, particularly for saving government resources and avoiding adverse decisions from the Court. If aggressively followed, this policy may result in less False Claims Act cases proceeding to litigation.

The second memorandum, Limiting Use of Agency Guidance Documents In Affirmative Civil Enforcement Cases, was issued by former Associate Attorney General Rachel Brand, and follows a November 2017 memorandum from Attorney General Sessions that prohibited DOJ components from issuing guidance documents that would effectively bind the public without undergoing the rulemaking process. The Brand Memorandum extends this concept to government False Claims Act theories based on a failure to follow agency guidance documents. “Department litigators may not use noncompliance with guidance documents as a basis for proving violations of applicable law” in affirmative civil enforcement cases. The policy seeks to avoid allowing guidance documents to create binding requirements that do not exist by statute or regulation. The government must prove noncompliance with the statute or regulation, and cannot use noncompliance with an agency guidance document as a substitute. The Brand Memorandum will limit government theories of False Claims Act liability that are based on the violation of agency guidance documents as opposed to the relevant statute or regulation.

Last week, in United States v. Scully, the Second Circuit vacated the conviction of a distributor of pharmaceutical products on misbranding charges due to evidentiary issues surrounding his advice-of-counsel defense at trial.

The Rise and Fall of Pharmalogical

William Scully and Rodi Lameh founded Pharmalogical, Inc,, planning to acquire pharmaceutical products from manufacturers and sell them to doctors, hospitals and clinics. Eventually, Scully set the company on the course of “parallel importing,” importing foreign versions of FDA-approved products into the United States from European distributors. The company purchased these drugs at reduced prices and sold them to customers in the United States at under-market prices. The product labels for the products did not contain a National Drug Code, so Scully and Lameh obtained an attorney opinion that Pharmalogical had no reason to believe it was in violation of any statute or regulation. This initially satisfied purchasers that Pharmalogical was authorized to sell. Later, when Pharmalogical was advised by the FDA that foreign-made versions of FDA-approved drugs were considered unapproved, it obtained a second legal opinion that the importation of the product would not violate United States criminal laws. After the FDA executed warrants to search Pharmalogical’s offices, Scully and Lameh each retained individual lawyers, and Pharmalogical ceased selling products.

Scully and Lameh were indicted for using Pharmalogical to import foreign versions of prescription drugs and medical devices for use in the United States. Lameh pleaded guilty to conspiracy to distribute misbranded drugs and cooperated with the government. Scully went to trial.

At trial, Scully introduced an advice-of-counsel defense, contending that he relied in good faith on the advice of attorneys concerning the legality of his conduct. Scully called the attorney who provided opinions to Pharmalogical on the legality of the sales. After the government effectively undermined the defense based on that testimony, Scully sought to testify himself that his individual attorney advised him the business was legal, rather than calling the second attorney to testify. EDNY Judge Arthur Spatt ruled that such testimony, while not hearsay as it went to state of mind, was inadmissible under the balancing inquiry of FRE 403, particularly where the second attorney was available to testify. The jury ultimately found Scully guilty. On appeal, Scully challenged the exclusion of evidence of his attorney’s legal advice and the jury instructions on the advice-of-counsel defense.

Evidence of Legal Advice

The Second Circuit held that the district court erred in balancing the probative value and prejudicial effect of the evidence of Scully’s testimony as to his individual attorney’s legal advice under FRE 403. The statement was not hearsay as it was offered to prove the defendant’s state of mind and not for its truth. Moreover, the Second Circuit held that it was not appropriate to require Scully to call his attorney as a witness, as the government had ample means to challenge Scully’s testimony, including by cross-examining Scully or by calling the attorney as a rebuttal witness. The Court determined that Scully was not legally required to call his attorney, but was competent to testify about his own state of mind, and the question of his credibility should have been up to the jury. Scully was therefore entitled to a new trial.

Advice-Of-Counsel Jury Instruction

While Scully waived arguments concerning the jury instruction on advice-of-counsel, the Second Circuit provided guidance on the jury instruction as the case was being remanded for a new trial.

The Circuit noted that, in a fraud case, the advice-of-counsel defense is not an affirmative defense, but is instead evidence that, if believed, can raise a reasonable doubt on whether the government has proved the required element of the offense that the defendant had an “unlawful intent.” The jury instruction must therefore advise the jury that the government at all times bears the burden of proving beyond a reasonable doubt that the defendant had the state of mind required for conviction. The district court should therefore not instruct the jury that the defendant “has the burden” of establishing the defense or must “satisfy” the elements of the defense. Instead, the Court referenced model jury instructions from Judge Leonard Sand and the Seventh Circuit, demonstrating that the defendant need not establish good faith, but that the government must carry its burden of proof to establish the intent element of the crime.

Where items or services are not reimbursable by a federal healthcare program, providers and referring parties are not subject to AKS prosecution. However, due to an emerging trend in prosecution, the absence of reimbursement from federal healthcare programs should no longer leave providers and referral sources with a sense of security that they cannot be prosecuted for kickback arrangements.

Prosecutors are increasingly bringing charges against payers and recipients of remuneration for referrals in the medical arena under the Travel Act. The Travel Act criminalizes the use of the United States mail and interstate or foreign travel for the purpose of engaging in certain specified criminal acts. The Travel Act typically enforces two categories of state laws – laws prohibiting commercial bribery (i.e. corrupt dealings to secure an advantage over business competitors) and laws addressing illegal remuneration, including specific provisions regarding improper payments in connection with referral for services.

In two very recent high profile cases, prosecutors brought charges against those allegedly involved in kickback schemes under the both AKS and the Travel Act – Biodiagnostic Laboratory Services in New Jersey and Forest Park Medical Center in Texas. Both cases have resulted in several plea bargains, yet both have charges under AKS and the Travel Act that are still pending. While no court has directly ruled on the merits of prosecuting kickback schemes for medical services and items under the Travel Act, it is noteworthy that, in the Forest Park Medical Center case, the charges under the Travel Act survived a motion to dismiss at the district court level just last month.

All parties involved in referral arrangements for medical items or services should be on heightened alert as a result of this development. Whereas AKS can only be used to prosecute parties to a kickback arrangement where federal healthcare program funds are at issue, the use of the Travel Act may broaden prosecutors’ reach to the private payor sector, even where federal healthcare programs are not involved.